Category Archives: Small Businesses

VAT: Global Accounting simplification

By   27 April 2015
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VAT: Second Hand Scheme  – Global Accounting simplification

Overview

The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (Margin Scheme).

It differs from the standard Margin Scheme because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item.  It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard Margin Scheme

There two significant differences in respect of Global Accounting compared to the standard Margin Scheme. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard Margin Scheme no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit.  There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard Margin Scheme.  However, the following goods cannot be included in Global Accounting:

  • individual items costing more than £500 (although these can be accounted for via the standard Margin Scheme)
  • aircraft, boats and outboard motors,
  • caravans and motor caravans,
  • horses and ponies, and
  • motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand.  It may include the value of this stock when it calculates the total purchases at the end of the first period.  If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Valuation of stock

A business must be able to identify:

  • stock which is eligible for Global Accounting, and
  • its purchase value

It would normally be possible to establish the value from the original purchase documentation, ie; invoices.

But if a business is newly VAT registered, or it does not have original purchase records it may determine the purchase value using another method.   There is no set way of doing this, but a business must be able to demonstrate that the method used has produced a fair and reasonable total.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

a)      Total purchase value of stock on hand 10,000

b)      Total purchases 2,000

c)      Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay.  However, negative margin must be carried forward into the next period as follows:

Period Two

a)      Negative margin from previous period 4,000

b)      Total purchases 1,000

c)      Total sales 7,000

d)      Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000

e)      VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal Margin Scheme – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records.  A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If we HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

  • check that the goods are eligible for Global Accounting
  • obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased.  If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
  • enter the purchase details of the goods in your Global Accounting purchase records.  The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

Details to be included on purchase invoices

 Purchase invoices must include:

your name and address

  • the seller’s name and address
  • invoice number
  • date of transaction
  • description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
  • total price, you must not show VAT separately, and
  • for goods purchased from another VAT-registered dealer: the statement “Global Accounting Invoice”

Remember: if you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

  • recording the sale in the usual way
  • issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
  • transferring totals of copy invoices to the Global Accounting sales record or summary
  • you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Details to be included on sales invoices

 A sales invoice must be issued to other VAT-registered customers.  These invoices and any other Global Accounting sales invoice issued must show the following details:

  •  your name, address and VAT registration number
  • the buyer’s name and address
  • invoice number
  • date of sale
  • description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
  • total price – you must not show VAT separately
  • the statement “Global Accounting Invoice”
  • you are selling an item for more than £500 and you don’t want the purchaser to know that you bought it under Global Accounting, you may use one of the Margin Scheme sales invoice statements.

 Details to be included in purchase and sales summaries

 Although a business does not have to keep purchase and sales records or summaries in any particular way, they must include the following details taken from the purchase invoices and any sales invoices you issue:

  •  invoice number (where the purchase invoice shows one)
  • date of purchase/sale
  • description of goods, and total price

 Cessation of using the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period.  In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Here is an example of a closing adjustment under Global Accounting: At the end of the period calculate:

(a)    value of purchases during the period – £5,000

(b)    value of sales during the period – £10,000

(c)    purchase value of closing stock – £8,000

(d)    add purchase value of closing stock to sales for period (c+b) – £18,000

(e)    subtract purchases in this period from sale (d-a) – £13,000

(f)     VAT due on margin (e x 1/6) – £2,166.66

You must make a similar adjustment if you transfer goods as part of a transfer of a going concern (TOGC). In that case, you should add the purchase value of goods included in the scheme to your sales figure for the period in which the TOGC takes place.  This adjustment is separate from the TOGC itself, which is not subject to VAT.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly.  This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs?

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

EC Sales List, Intrastat and VAT returns

VAT registered businesses in the UK who make supplies of goods to VAT-registered businesses in other EC Member States are required to complete lists (form VAT 101) of their EC supplies.

But a business should not include any margin schemes transactions on an EC Sales list because they will be subject to VAT in the UK.

Intrastat is the system for collecting statistics on the trade in goods between EC Member States. But, because margin scheme goods are subject to VAT in the country of origin, there is no requirement either:

  • to include margin scheme purchases or sales in boxes 8 and 9 of your VAT return, or
  • to complete a supplementary declaration

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.

© Marcus Ward Consultancy Ltd

The penalty regime….the dark side of VAT!

By   9 February 2015
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I have made a lot of references to penalties in my other articles. So what are they, and how much could they cost if a business gets it wrong?

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then usually HMRC will not apply a penalty.

Penalty Categories 

–  An error, when reasonable care not taken: 30%;

–  An error which is deliberate, but not concealed: 70%;

–  An error, which is deliberate and concealed: 100%.

Unhelpfully, there is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.  HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

–  Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

–  Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

–  Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to have their VAT returns reviewed.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure. A business should apply to this in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the Tribunal. A business can appeal whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.  These are just the penalties for making errors on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Help

In my view there is generally a very good chance of success in a business challenging a penalty.  Each case should at least be reviewed by an adviser, and experience insists that a robust defence often results in full or part mitigation.  We have a very good track record in appealing HMRC decisions and have taken cases right up to High Court.  However, most cases can be settled before they get to Tribunal, and indeed, the greatest chance of success is usually at the beginning of the process before HMRC become entrenched.

VAT implications of renewable energy sources

By   15 January 2015
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If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

 Further…

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows Member States to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

What is the value of a sale for VAT? – Prompt Payment Discounts

By   15 December 2014
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The value of a supply is crucial for VAT.

The area of discounts has always been problematic, particularly in respect of prompt payments discounts (which customers sometimes do, and sometimes do not take advantage of).

HMRC has clarified the position and has published:  which confirms that from 1 April 2015, all businesses that offer Prompt Payment Discounts will be obliged to account for VAT on the sum actually received in return for the goods or services supplied (rather than the reduced value offered – as is the current position).

VAT MOSS (Mini One-Stop Shop) Update – Small businesses

By   8 December 2014
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Further to my article on the introduction of new place of supply rules and the MOSS for B2C supplies of telecoms, broadcasting and other e-services HMRC have now stated its position on smaller businesses.

Under the initial rules, businesses which have income below the UK VAT registration turnover limit of (currently £81,000 pa) would be forced to either register for VAT in each EC Member State in which they made a sale (where the customer belongs), or registering for VAT in the UK in order to use the simplified MOSS procedure.

This would, of course, mean that such a business would lose the benefit of not being UK VAT registered and consequently having to do business in the UK with the addition of UK VAT.

HMRC has now indicated that these smaller businesses will be permitted to separate their UK and EC trading and register for VAT in the UK (so they can use the MOSS) without accounting for UK VAT on their domestic trading as long as their UK turnover remains below the VAT registration threshold.

This is curious (but welcome) since HMRC have always been against disaggregation.

For further information please see my new 2015 rules flowchart

Bad Debt Relief (BDR) – Avoiding the VAT burden.

By   27 November 2014
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Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

There is specific relief however:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure). At least six months (but not more than three years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required
Various records and evidence must be kept (for four years from the date of claim), in particular to identify:
• The time and nature of the supply, the purchaser, and the consideration
• The amount of VAT chargeable on the supply
• The accounting period when this VAT was accounted for and paid to HMRC
• Any payment received for the supply
• Entries in the refund for bad debts account
• The accounting period in which the claim is made.

Procedure for claiming BDR
The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

Repayment of refund
Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Refund of input tax to debtor
Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services

VAT Jargon Buster!

By   5 November 2014
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Unfortunately, VAT is littered with phrases, acronyms and jargon which can be impenetrable to people that have to deal with the tax.  I have explained the main terms used below and tried to demystify the gobbledygook!

Accounting period

This is the period of time reported in your VAT Return, usually three months.

Acquisitions

Goods brought into the UK from other EC countries (different from goods brought into the UK from outside of the EC; which are known as imports).

Capital Goods Scheme (CGS)

A mechanism for spreading the input tax incurred on computer equipment exceeding £50,000 or property exceeding £250,000 of standard-rated cost.

Consideration

Something that is done or given in exchange for something else. Consideration can be in monetary or non-monetary form. If there is no consideration there is no supply.

Corporate body

An incorporated body, eg; a limited company, limited liability partnership, friendly, industrial or provident society.

Distance sales

When a business in one EC country sells and ships goods directly to consumers in another EC country, eg; internet sales.

Exempt supply

A supply that is exempt from VAT by law eg; rent, insurance and financial services.  It is not a taxable supply and generally does not allow the recovery of VAT incurred on associated expenditure.

Exports

Goods sent to countries outside of the EC.

Despatches

Goods sent to another EC country.

Imports

Goods brought into the EC from countries outside of the EC.

Input tax

Refers to the VAT you pay on your purchases – goods or services you use when running your business.

New building

A commercial building less than three years old where a freehold disposal is compulsorily standard-rated.

Non-residential

A building not used as a dwelling.

Option to tax

Changes the supply of a commercial property from exempt to standard rated.  This is done solely to recover or avoid input tax attributable.

Output tax

Refers to the VAT you charge on your sales which your clients/customers pay you.

Outside the scope of VAT

Goods and services that are completely outside the scope of VAT altogether, eg; taxes, supplies in other countries, TOGCs and wages paid to employees.

Partial exemption

A business which incurs input tax relating to both taxable and exempt activities is partially exempt and will probably not be able to recover all of its input tax.

Place of supply

The country where a supply of goods or services is deemed to be made for VAT purposes. This is the country in which VAT must be accounted for.

Reduced rate

The rate applied to essential goods and services, such as gas and electricity for residential purposes. Currently at 5%.

Registration

Being VAT registered – accounting for output tax on sales and recovering input tax.  A business needs to VAT register when its turnover exceeds certain limits.

Self-billing

Where a customer raises a self-billing document and sends a copy to its supplier with its payment – rather than the supplier issuing an invoice.

Standard rate

A taxable supply subject to UK VAT at the current standard rate of 20%.

Supply

Providing goods or services in return for consideration, normally monetary.

Supply of goods

When exclusive ownership of goods passes from one person to another.

Supply of services

Supply, for consideration, of something provided which is not goods.

Tax period

(Also known as accounting period) The period of time covered by your VAT return. Usually quarterly or monthly.

Taxable person

Any business which supplies goods or services and is required to be registered for VAT.  This includes; individuals, partnerships, companies, clubs, associations and charities etc.

Taxable supplies

Goods and services supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate. They usually permit the recovery of VAT incurred on the costs incurred in making them.

Taxable turnover

Taxable turnover is the total value, net of VAT, of the taxable supplies you make in the UK within one year.  It is used to establish whether registration is necessary.

Tax point (Time of supply)

The date when a business must account for VAT on supplies and when input tax may be reclaimed. This dictates on what VAT return the transaction is accounted for.

Transfer Of A Going Concern (TOGC)

A sale of a business which continues after transfer.  This is a VAT free transaction if certain tests are met.

Zero-rated

Is a taxable supply but subject to UK VAT at a rate of 0%.

© MWCL 2014

Tax Points (Time Of Supply)

By   30 October 2014
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The tax point for a transaction is the date the transaction takes place for VAT purposes.

You need to know this because it’s included on VAT invoices and it tells you in which VAT period the transaction should be accounted for.  The tax point may be summarised (in most circumstances) as the earliest of:

  • The date an invoice is issued
  • The date payment is received
  • The date title to goods is passed, or services are completed.

Some brief examples:

Situation Tax point
No invoice needed Date of supply
VAT invoice issued Date of invoice
VAT invoice issued 15 days or more after the date of supply Date the supply took place
Payment or invoice issued in advance of supply Date of payment or invoice (whichever is earlier)
Payment in advance of supply and no VAT invoice yet issued Date payment received

The date of supply is:

  • for goods – the date they’re sent, collected or made available (eg installed in the customer’s house)
  • for services – the date the work is finished

There are certain exceptions, so care should be taken when establishing a tax point.

What VAT CAN’T you claim?

By   4 September 2014
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The majority of input tax incurred by most VAT registered businesses may be recovered.  However, there is some input tax that may not be.  I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT ClaimsWebsite Images0006

A brief overview

  •  No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances.  A claim is invalid without the correct paperwork.  HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do).  So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation.  HMRC are within their rights to disallow a claim if any of the details are missing.  A full guide is here: https://www.marcusward.co/vat-invoices-a-full-guide/

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it.  If a business makes only exempt supplies it cannot even register for VAT.  There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here: https://www.marcusward.co/wp-content/uploads/2014/03/Partial-Exemption-Guide.pdf

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief.  Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here: https://www.marcusward.co/wp-content/uploads/2014/03/Charities-and-Not-For-Profit-Entities-A-Brief-VAT-Guide.pdf

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas.  The input tax incurred on staff entertainment costs is however recoverable.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  •  A business using certain schemes

For instance, a business using the Flat rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users

  •  VAT charged in error

Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate.  A business’ recourse is with the supplier and not HMRC.

  •  Goods and services not used for your business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use.  This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.

  • VAT paid on goods and services obtained before VAT registration

This is not input tax and therefore is not claimable.  However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

  •  Second hand goods

Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here: https://www.marcusward.co/disbursements-vat/

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EC States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

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